The collapse of the American political system

"Reading
The News On America Should Scare Everyone, Every Day... But It
Doesn't"

Reading
the news on America should scare everyone, and every day, but it
doesn’t. We’re immune, largely.

Take
this morning. The US Republican party can’t get its healthcare plan
through the Senate. And they apparently don’t want to be seen
working with the Democrats on a plan either. Or is that the other way
around? You’d think if these people realize they were elected to
represent the interests of their voters, they could get together and
hammer out a single payer plan that is cheaper than anything they’ve
managed so far. But they’re all in the pockets of so many sponsors
and lobbyists they can’t really move anymore, or risk growing a
conscience. Or a pair.

What
we’re witnessing is the demise of the American political system, in
real time. We just don’t know it. Actually, we’re witnessing the
downfall of the entire western system. And it turns out the media are
an integral part of that system.

The
reason we’re seeing it happen now is that although the narratives
and memes emanating from both politics and the press point to
economic recovery and a future full of hope and technological
solutions to all our problems, people are not buying the memes
anymore. And the people are right.

Tyler
Durden ran a Credit Suisse graph overnight that should give everyone
a heart attack, or something in that order. It shows that nobody’s
being stocks anymore, other than the companies who issue them. They
use ultra-cheap leveraged loans to make it look like they’re doing
fine. Instead of using the money/credit to invest in, well, anything,
really. You can be a successful US/European company these days just
by purchasing your own shares. How long for, you ask?

As
CS’ strategist Andrew Garthwaite writes, “one of the major
features of the US equity market since the low in 2009 is that the US
corporate sector has bought 18% of market cap, while institutions
have sold 7% of market cap.” What this means is that since the
financial crisis, there has been only one buyer of stock: the
companies themselves, who have engaged in the greatest debt-funded
buyback spree in history.

Why
this rush by companies to buyback their own stock, and in the process
artificially boost their Earning per Share? There is one very simple
reason: as Reuters explained some time ago, “Stock buybacks enrich
the bosses even when business sags.” And since bond investor are
rushing over themselves to fund these buyback plans with “yielding”
paper at a time when central banks have eliminated risk, who is to
fault them.

More
concerning than the unprecedented coordinated buybacks, however, is
not only the relentless selling by institutions, but the persistent
unwillingness by “households” to put any new money into the
market which suggests that the financial crisis has left an entire
generation of investors scarred with “crash” PTSD, and no matter
what the market does, they will simply not put any further capital at
risk.

In
other words, the system doesn’t only keep zombies alive, making it
impossible for anyone to see who’s healthy or not, no, the system
itself has become a zombie.

The
article mentions Blackrock’s Larry Fink talking about ‘cash on
the sidelines’, but puhlease… Central banks have injected another
$2 trillion into the zombie system this year alone, and that gives
you that graph. Basically no-one supposedly on the sideline has a
penny left.

So
that’s your stock markets. Let’s call it bubble no.1. Another
effect of ultra low rates has been the surge in housing bubbles
across the western world and into China. But not everything looks as
rosy as the voices claim who wish to insist there is no bubble in
[inject favorite location] because of [inject rich Chinese]. You’d
better get lots of those Chinese swimming in monopoly money over to
your location, because your own younger people will not be buying.
Says none other than the New York Fed.

College
tuition hikes and the resulting increase in student debt burdens in
recent years have caused a significant drop in homeownership among
young Americans, according to new research by the Federal Reserve
Bank of New York. The study is the first to quantify the impact of
the recent and significant rise in college-related borrowing—student
debt has doubled since 2009 to more than $1.4 trillion—on the
decline in homeownership among Americans ages 28 to 30. The news has
negative implications for local economies where debt loads have
swelled and workers’ paychecks aren’t big enough to counter the
impact. Homebuying typically leads to additional spending—on
furniture, and gardening equipment, and repairs—so the drop is
likely affecting the economy in other ways.

As
much as 35%
of the decline in young American homeownership from 2007 to 2015 is
due to higher student debt loads,
the researchers estimate. The study looked at all 28- to
30-year-olds, regardless of whether they pursued higher education,
suggesting that the fall in homeownership among college-goers is
likely even greater (close to half of young Americans never attend
college). Had tuition stayed at 2001 levels, the New York Fed paper
suggests, about 360,000 additional young Americans would’ve owned a
home in 2015, bringing the total to roughly 2.9 million 28- to
30-year-old homeowners. The estimate doesn’t include younger or
older millennials, who presumably have also been affected by rising
tuition and greater student debt levels.

Young
Americans -and Brits, Dutch etc.- get out of school with much higher
debt levels than previous generations, but land in jobs that pay them
much less.

Ergo,
at current price levels they can’t afford anything other than
perhaps a tiny house. Which is fine in and of itself, but who’s
going to buy the existent McMansions? Nobody but the Chinese. How
many of them would you like to move in? And that’s not all. Another
fine report from Lance Roberts, with more excellent graphs, puts the
finger where it hurts, and then twists it around in the wound a bit
more:

Over
the last 30-years, a big driver of home prices has been the unabated
decline of interest rates. When declining interest rates were
combined with lax lending standards – home prices soared off the
chart. No money down, ultra low interest rates and easy qualification
gave individuals the ability to buy much more home for their money.
The problem, however, is shown below. There is a LIMIT to how much
the monthly payment can consume of a families disposable personal
income.

In
1968 the average American family maintained a mortgage payment, as a
percent of real disposable personal income (DPI), of about 7%. Back
then, in order to buy a home, you were required to have skin in the
game with a 20% down payment. Today,
assuming that an individual puts down 20% for a house, their mortgage
payment would consume more than 23% of real DPI. In
reality, since many of the mortgages done over the last decade
required little
or no money down, that number is actually substantially higher. You
get the point. With real disposable incomes stagnant, a rise in
interest rates and inflation makes that 23% of the budget much harder
to sustain.

In
1968 Americans paid 7% of their disposable income for a house. Today
that’s 23%.

That’s
as scary as that first graph above on the stock markets. It’s hard
to say where the eventual peak will be, but it should be clear that
it can’t be too far off. And Yellen and Draghi and Carney are
talking about raising those rates.

What
Lance is warning for, as should be obvious, is that if rates would go
up at this particular point in time, even a lot less people could
afford a home. If
you ask me, that would not be so bad, since they grossly overpay
right now, they pay full-throttle bubble prices, but the effect could
be monstrous. Because not only would a lot of people be left with a
lot of mortgage debt, and we’d go through the whole jingle mail
circus again, yada yada, but the economy’s main source of ‘money’
would come under great pressure.

Don’t
let’s forget that by far most of our ‘money’ is created when
private banks issue loans to their customers with nothing but thin
air and keyboard strokes. Mortgages are the largest of these loans.
Sink the housing industry and what do you think will happen to the
money supply? And since inflation is money velocity x money supply,
what would become of central banks’ inflation targets? May I make a
bold suggestion? Get someone a lot smarter than Janet Yellen into the
Fed, on the double.

Or, alternatively, audit and close the whole
house of shame.

We’ve
had bubbles 1, 2 and 3. Stocks, student debt and housing. Which, it
turns out, interact, and a lot.

An
interaction that leads seamlessly
to bubble 4: subprime car loans. Mind
you, don’t stare too much at the size of the bubbles, of course
stocks and housing are much bigger issues, but focus instead on how
they work together. As for the subprime car loans, and the subprime
used car loans, it’s the similarity to the subprime housing that
stands out. Like we learned nothing. Like the US has no regulators at
all.

It’s
classic subprime: hasty loans, rapid defaults, and, at times,
outright fraud. Only this isn’t the U.S. housing market circa 2007.
It’s the U.S. auto industry circa 2017. A decade after the mortgage
debacle, the financial industry has embraced another type of subprime
debt: auto loans. And, like last time, the risks are spreading as
they’re bundled into securities for investors worldwide. Subprime
car loans have been around for ages, and no one is suggesting they’ll
unleash the next crisis.

But
since the Great Recession, business has exploded. In 2009, $2.5
billion of new subprime auto bonds were sold. In 2016, $26 billion
were, topping average pre-crisis levels, according to Wells Fargo.
Few things capture this phenomenon like the partnership between Fiat
Chrysler and Banco Santander. [..] Santander
recently vetted incomes on fewer than one out of every 10 loans
packaged into $1 billion of bonds,
according to Moody’s.

If
it’s alright with you, we’ll deal with the other main bubble,
no.5 if you will, another time. Yeah, that would be bonds.

Sovereign,
corporate, junk, you name it.

The
4 bubbles we’ve seen so far are more than enough to create a huge
crisis in America.

Don’t
want to scare you too much all at once. Just you read the news again
tomorrow. There’ll be more.

And
the US Senate is not going to do a thing about it. They’re too busy
not getting enough votes for other things.